The last several years, I’ve written a paper early in the year laying out the key policy issues affecting finance that are likely to be the focus of policy maker attention, and therefore also of strong interest to financial institutions.You can find last year's paper, which covers the key policy issues in 2023, here.
My annual predictions regarding these key topics have held up well, although there are always additional issues that pop up, such as the Russian invasion of Ukraine or the crises at Silicon Valley Bank and Credit Suisse. It’s no surprise that my choice of topics remain pretty accurate, since I base my views on extensive conversations I have each year with central bank governors, heads of regulatory bodies, and other senior officials worldwide.
Note, my focus is primarily on the topics that are likely to receive the most policy attention. This may differ from the list of major financial stability risks, although there is often considerable overlap between the two.
The consequences for misreading policy issues are always high for financial institutions. But given the range of themes this year and their magnitude, the stakes are higher than usual.
Key policy issues for 2024 in finance
I begin the list with two overarching themes that are important in their own right and also shape the discussion and substance of the other topics. The first: populism, politics, and the US and European Union elections. The second: the New Monetary Order and its impact on the financial sector.
Following these two themes, I then move on to eight specific topics. They are: the lessons from the March 2023 banking turmoil; geopolitics and finance; government debt risks and finance; the role of non-bank financial institutions; Basel 3 endgame, especially the impacts in the United States and globally of the US implementation; digital assets, especially, outside the United States, central bank digital currencies (CBDCs); climate-related risk and finance; and artificial intelligence (AI) and other technologies affecting finance.
Key insights into the evolving financial landscape
Populism, politics, and the US and European Union elections
Populismcontinues to grow in many countries. This has important indirect effects on the financial sector by influencing the economy, politics, etc. It also has potential direct impacts, such as the clamor in some countries for additional taxes on banks. The detailed section includes a link to my earlier paper "Financial Institutions In An Age Of Populism."
Looking beyond populism, elections, particularly in the US and EU, will influence financial sector policy. In the US, for example, Democratic views on financial regulation diverge considerably from Republican views.
The New Monetary Order and its impact on the financial sector
Twelve years of “low for long” monetary policy heavily affected the evolution of the financial sector in most financial centers. The sector will need to adapt considerably further than it has to the New Monetary Order, creating both opportunities and risks. The detailed section references three comprehensive papers written by me and my Oliver Wyman colleagues.
Lessons from the March 2023 banking turmoil
There are a wide range of views about what we learned from the failures of Credit Suisse and several US regional banks. Even where there is agreement on the lessons, there remains debate over what to do as a result. The detailed section discusses what we’ve learned and what policymakers are likely to do as a result. Most potential changes are focused on; liquidity, interest rate risk, capital levels, proportionality of regulation across size levels, and resolution procedures.
Geopolitics and finance
Policy makers and executives should do extensive scenario analysis on potential geopolitical shocks, given our recent experience. Beyond that, there is active policy debate about the extent to which Russia, China, and other countries may successfully construct an alternative financial ecosystem to reduce their risk from sanctions, seizures of reserve assets, etc.
Government debt risks and finance
Now that money is no longer essentially free, government debt levels in many countries can create risks for financial institutions in multiple ways. For example, interest rates on government debt significantly influence bank funding costs and the rates they charge their borrowers. Banks also own substantial amounts of government debt, creating pricing risk. Further, much of wholesale finance uses government debt as collateral. Finally, economic performance will be significantly influenced by political choices about how to manage government debt levels. As a result of all this, monetary and regulatory policy will be noticeably influenced by government debt levels and activity in the related financial markets.
Role of non-bank financial institutions (NBFIs)
NBFIs are increasingly important to the financial sector and there is a very active policy debate on how regulation and supervision should change to reflect this.
Basel 3 endgame — impacts in the US and globally due to implementation
The final stage of the Basel Committee’s revisions to global capital standards for banks has moved to the national level, where individual jurisdictions must choose how to implement them. There is a large divergence between the US, UK, and EU in how they propose to do this. The detailed section walks through these differences, how the proposals may change, and what the implications are.
Digital assets with a focus on central bank digital currencies outside the US
Digital assets are not going away. Every country needs appropriate laws, regulations, and supervisory approaches to reflect this. The detailed section walks through developments in this area.
Climate-related risk and finance
On the one hand, the financial sector and its regulators continue to make substantial progress in thinking through how to analyze and regulate for climate-related risks. On the other hand, the public and political backlash against the perceived costs of tackling climate-related risks has risen considerably.
AI and other tech affecting finance
Generative AI and other tech developments will strongly affect the financial sector over time. Much of this will be indirect, by affecting the wider economy and society. Some of the impacts, though, will be direct. Cost structures will change, presumably lowering expenses noticeably. There will also be competitive impacts. For example, my intuition is that this will accelerate the moves by Big Tech into traditional finance.
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Key Policy Issues In Finance In 2024
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